What is the FTSE 100 index and how do you invest in it?

George Sweeney 15th May 2022 No Comments

Reading Time: 5 minutes

Understanding what the FTSE 100 index is and how it operates is a must-know for British investors. Even if you don’t plan on putting your money to work there, a better grasp will give you a great investing foundation.

So, we’re going to be covering all things ‘footsie’. You’ll learn all about this top UK index and why investors love it. Also, we’ll reveal a few different ways you can invest and use this index as part of your strategy.

Keep reading for complete and total coverage, or click a link below to shoot straight to a specific spot…

• What is the FTSE 100?
• Why is it popular?
• What are some of the top shares?
• Why invest in this index?
• 5 ways to invest in the FTSE 100
• How to invest
• Alternative ways to invest
• What to be aware of
• What else do investors need to know?

 

What is the FTSE 100 index?

This is a big list containing one hundred of the top companies listed on the London Stock Exchange (LSE) here in the UK. The acronym FTSE refers to Financial Times Stock Exchange.

It’s used as a key measure to see how the biggest British firms are performing. When you hear people talk about investing into the UK stock market, they’re usually referring to the FTSE 100 (or one of its close relatives like the FTSE All Share).

If you’re interested to know more about how this all works, check out this article with more detail on what is FTSE and why you should care.

 

Why is the FTSE 100 popular for investors?

This index has been a popular choice for investors around the world because it’s an excellent way to get exposure to the UK market.

Although many like to gibe that we don’t tend to have the most exciting companies here in the UK, we do have plenty of solid firms. Companies that have been around the block and seen it all.

Sure, the closest thing we have to Silicon Valley is Camber Sands. But, what we lack in exciting tech and growth, the FTSE 100 makes up for in sturdy income.

Many top UK stocks and shares have ‘old-school’ business models. But, this isn’t necessarily a bad thing.

Although the FTSE 100 doesn’t see growth reaching anywhere near something like the S&P 500 – it has been reliably dishing out dividends for yonks.

 

What are some of the top FTSE 100 shares?

The index reshuffles regularly depending on the performance and size of companies. But, at the time of writing, these were the top 10 largest firms in the index:

1. Shell (SHELL)
2. AstraZeneca (AZN)
3. HSBC (HSBA)
4. Unilever (ULVR)
5. GlaxoSmithKline (GSK)
6. Diageo (DGE)
7. BP (BP)
8. British American Tobacco (BATS)
9. Rio Tinto (RIO)
10. Glencore (GLEN)

If you dig a little deeper into these companies, you’ll notice that a commitment to dividends is a top priority.

 

Why invest in the FTSE 100?

Investors putting money into the FTSE 100 aren’t expecting meteoric growth. But, they do look for reliable and stable income instead.

This ‘Steady Eddie’ approach is extremely attractive because of the c-word… compounding.

For long-term investors, getting a small level of consistent gains each year can lead to extraordinary wealth.

This is due to the power of compound interest. If you’ve not looked at a compound interest calculator before, I’d highly recommend it.

By investing in the FTSE 100 index, even without giant gains, you can still become rich. This is because when you reinvest the dividends paid out to you, it can massively boost your returns over time.

Another reason this UK index remains so popular is because it has been fairly dependable. So, for those planning retirement or looking for pension investing options, the FTSE 100 is not as volatile as some other investments.

If you’re withdrawing money from your investments on a regular basis, you don’t want your portfolio to be swinging wildly in value. And this is where the FTSE really shines.

 

5 ways to invest in the FTSE 100

Depending on your strategy and how you like to invest, there are loads of different ways that you can use this index to your advantage. Here are a few examples to consider:

1. Invest in a cheap FTSE 100 index-tracking fund or ETF.
2. Buy shares in the top FTSE companies (most of the money you put in an index fund goes to the top 10 anyway).
3. Use a fund that focuses on the best FTSE 100 dividend-paying stocks.
4. Put money into every single FTSE 100 firm (although this is harder to manage and expensive if your investing platform has high fees).
5. Find an income investment trust that focuses on top FTSE shares. Perhaps also containing some other investments for a more diversified approach.

 

How do you actually invest in the FTSE 100?

Once you’ve decided which way you’d like to invest, the next step is to start investing. Here’s a step-by-step guide to help:

1. Open a brokerage account with an investing platform (most big names in the UK such as eToro will let you access a FTSE 100 ETF or index fund quite easily).
2. Decide how much you’d like to invest and deposit it into your account.
3. Depending on which way you plan to invest, you can make a single or multiple investments.
4. Once you’re all set, hit ‘buy’.

If you’d like a more detailed guide on the exact details of opening an account and making an investment, here’s a complete walkthrough on how to create an account and buy shares with eToro (including pictures and everything!).

 

What are some alternative ways to invest?

Investing in the FTSE 100 index can be extremely useful. But, it doesn’t have to be the be-all and end-all of your strategy.

You might also want to consider investing in an index fund or ETF that covers the FTSE 250, 350, or FTSE All-Share indices.

Doing this gives you greater exposure to UK businesses. It allows you to invest in some of the smaller firms instead of concentrating on all the big dogs.

Also, you don’t need to confine yourself to the UK. It may be worth looking abroad to invest in some other major indexes to give yourself some international diversification:

• S&P 500 (US)
• NASDAQ 100 (US)
• DAX (Germany)
• NIKKEI 225 (Japan)
• Hang Seng (China)

Investing outside the UK can give your portfolio more balance. This is because you’re not solely reliant on the performance of British shares.

Not only can this reduce your investment risk, but it can also help your portfolio grow.

 

What should investors be aware of?

Here’s what you should be aware of when investing in the FTSE 100:

• Most ETFs (exchange-traded funds) and index funds cover the same shares, so don’t pay higher fees than you need to.
• Make sure you have some other investments in your portfolio to stay diversified.
• What happens politically and economically here in the UK can have a big impact on your returns.
• There is a currency risk if the pound performs poorly.

 

What else do FTSE investors need to know?

There are plenty of ready to reap advantages when investing in the FTSE 100. This is especially true in an economic climate where we’re seeing high inflation and rising interest rates.

That being said, it’s always important to make sure you’re not relying too heavily on a single investment.

So, use the FTSE 100 as part of your overall strategy. Then, keep other types of investments that should perform well in different economic atmospheres over the long run.

And, if you want to stay up to date with all the latest market news and insights, make sure you sign up to the fortnightly MoneyMagpie Investing Newsletter.

This is not financial or investment advice. Remember to do your own research and speak to a professional advisor before parting with any money.